Canadian Pacific Rail to slash 4,500 jobs in efficiency drive

By
Allison Martell and Susan Taylor

Published
12/04/2012 19:46:29

A Canadian Pacific Railway locomotive sits at the Obico Intermodal Terminal in Toronto, May 23, 2012. REUTERS/Mike Cassese

(Reuters) - Canadian Pacific Railway Ltd <CP.TO>, the country's second biggest rail carrier, said on Tuesday it would cut 4,500 jobs by 2016 as part of a drive by its new CEO to slash costs and improve its operating efficiency, now the industry's worst.

The job reductions, announced by Chief Executive Hunter Harrison during a speech in New York, were deeper than expected. The company, which has 19,500 employees and contractors, had earlier estimated that it would cut 5 to 10 percent of its workforce, or about 1,950 at the most.

In his speech, Harrison said he pushed hard to cut costs in the five months since he was installed as chief executive after a proxy battle led by William Ackman's Pershing Square Capital Management Ltd, the U.S. hedge fund that is CP Railway's largest shareholder.

"Make no mistake, this is clearly, initially, a cost take-out story," he said. "I would emphasize to you this is not some experiment in a laboratory, this is a proven, tried and tested model."

Releasing an outline of its formal turnaround plan ahead of the speech, the company repeated its pledge to achieve an aggressive target for operating efficiency.

It aims to lower its operating ratio - currently at 74.1 percent - to the mid-60s by 2016.

The ratio, which shows operating expenses as a percentage of revenue, is a key indicator in the rail industry - the lower the number, the better. CP's ratio in the third quarter was the highest among North America's six biggest railways.

The pace of that change may be faster than predicted for the first 18 months, Harrison said, but will then "settle in."

Harrison pointed out that CP Railway had closed hump yards, facilities used to sort rail cars, in Toronto, Winnipeg, Calgary and Chicago since he took the helm. That will save C$40 million to C$50 million in direct costs, with "much more" in indirect savings, he said.

The company has also closed intermodal terminals in Milwaukee, Toronto, and Chicago.

Along the way to its 2016 target, CP Railway said it expected compound annual revenue growth of between 4 and 7 percent, measured against a 2012 base.

For 2016, it expects cash flow before dividends of C$900 million ($907 million) to C$1.4 billion.

Harrison also confirmed a Reuters report that the company would relocate its headquarters from downtown Calgary to a rail yard in the city, saving about C$18 million annually. CP is also considering the sale of surplus real estate.

In another measure to boost efficiency, CP said it would build longer rail sidings to accommodate longer trains. That will allow it to move greater volumes of material with fewer trains.

Looking for potential assets to divest, CP Rail said it would review options for its Delaware and Hudson Railway Co line in the U.S. Northeast.

"The first thing I did when I came to this organization ... was take the map home at night and start saying what if, what if," Harrison said. "What if we could do this? What if we could do that?"

Earlier on Tuesday, the company said it was exploring options and partnerships for the western part of its Dakota, Minnesota & Eastern Railroad.

Under Harrison's push to reduce bureaucracy and "red tape", a string of senior executives have left the company, including the chief operating officer.

Harrison, who is currently serving as COO and CEO, said the company is in no hurry to hire his successor. He has previously said he plans to stay at CP for three to five years.

Harrison was Ackman's favored candidate for chief executive ahead of the boardroom coup that saw Fred Green, the previous CEO, resign on the eve of the company's May annual meeting.

A lifelong railroader who headed up CP's chief rival, Canadian National Railway Co <CNR.TO> until 2009, Harrison is widely credited with making it into North America's most efficient railway.